Cisco Took $300M Revenue Hit From China Lockdowns, $200M From Ukraine

The COVID-19 lockdowns in China, which began in late March, “resulted in an even more severe shortage of certain critical components” than before, said Cisco CEO Chuck Robbins on an earnings call Wednesday for fiscal Q3 ended April 30. “This in turn prevented us from shipping products to customers at the levels we originally anticipated heading into Q3.”

Cisco’s fiscal Q3 revenue of $12.8 billion was flat year over year, and the company’s guidance is for a revenue decline of 1% to 5.5% in fiscal Q4 ending late July. “Our Q4 guidance incorporates a wider than usual range, taking into account the revenue impact of the war in Ukraine and the continuing uncertainty related to the China COVID lockdowns,” said Robbins. Cisco shares closed 13.7% lower Thursday at $41.72.

Senior management believes Cisco’s revenue performance in the coming quarters will be “less dependent on demand and more dependent on the supply availability in this increasingly complex environment,” said Robbins. “While certain aspects of the current situation are largely out of our control, our teams have been working on several mitigation actions to help alleviate many of the component issues that we've been facing. We believe that we will begin to see the benefits of these actions in the first half of next fiscal year.”

Cisco took a $200 million revenue hit in fiscal Q3 from its decision in March to stop business operations in Russia and Belarus, depriving the company of 2 percentage points of growth, said Chief Financial Officer Scott Herren. Historically, Russia, Belarus and Ukraine collectively generated about 1% of Cisco’s total revenue, said Herren, but the impact this quarter “was a bit higher than our historical run rate due to additional charges to revenue we recorded for uncollectible receivables and other items.”

Herren said “we currently see constraints in Q4 on roughly 350 critical components, out of a total of 41,000 unique component part numbers. Our supply chain team is aggressively pursuing multiple options to close those shortages.”

Cisco estimates it took a $300 million revenue hit from the lockdowns in Shanghai, said Robbins. “Shenzhen shut down, but again it opened up a week later, so we're talking really about the Shanghai situation,” and Cisco’s “inability to get power supplies out of China,” he said. The company had 11,000 printed circuit board assemblies built that “we couldn't get power supplies for because of the lockdown,” he said.

There’s “lots of components that go into our power supplies,” said Robbins. “We're not able to get those components” for as long as Shanghai is shut down, he said. “Shanghai now is saying they're going to open up June 1. We don't know exactly what that means.” When Shanghai reopens, said Robbins, “we believe that there is going to be lots of competition for ports capacity, airport capacity.” It will be “impossible for us to catch up on this issue in Q4, which is what led to the guidance in Q4,” he said.

On when things will start to improve, “if we make the assumption that China does begin to open up and we do begin to get more natural flow of the power supplies,” Cisco sees the shortages abating in the first half of its fiscal year ending January 2023, said Robbins. "We need to get through the next 90 days,” he said.